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Managing ‘Integration’ post acquisition – A CFO’s perspective

P Chandrashekar – President & Group Chief Financial Officer, Polycab Industries

An MBA in Finance from Narsee Monjee Institute of Management, Mumbai with B.Com from R A Podar College of Commerce, Mumbai. A Finance Professional with a Strong Business and Operational Orientation. 29 years of post qualification experience in a range of roles in different industries.

P Chandrashekar

In the course of the 29 years career, handled several dimensions of business from setting up new ventures to mergers and acquisitions, setting up systems and processes and implementing ERPs, scaling up businesses and turning around sick businesses as well as help CEOs run their businesses profitably and efficiently. Worked with Companies like the RPG Group, Jumbo Electronics Dubai, DHL, Coca Cola India, and Warburg Pincus Investee Companies.

Was involved with two Warburg invested companies, Radhakrishna Foodland and Alliance Tire Group. Was an entrepreneur, setting up a Turn Around and Asset Reconstruction Company. Presently working with Polycab Industries as President and Group Chief Financial Officer. Involved with Narsee Monjee Institute of Management Studies on the Board of Governments for their Retail MBA Program. Conducted sessions on “FINANCE FROM A CFO PERSPECTIVE” at Welingkar Institute of Management.

In the current post, Shekar shares his ‘own experience’ of how as the CFO he played a pivotal role which extended to building a team for the future, integrate IT and finance processes across entities and set up an operating structure at the group level to fix accountability and provide visibility into operating metrics. The  acquisitions were of global companies and Shekar also shares his perspective on how critical it is for organizations and CFO’s to also focus on getting the ‘cultural integration’ which invariably has a significant impact on the success of the integration.

Background

The Group is in the automotive sector, manufacturing niche products primarily for export.

The Group was set by promoters with significant expertise in the space supported by a leading Private Equity Firm.

The journey of the Company started with an overseas acquisition of manufacturing facilities and brands, followed by setting up greenfield manufacturing facility in India and then another overseas acquisition of distribution assets and brands.

The company moved to a level of USD 500 Million in a matter of 5 years.

Ownership and Management

The company is owned substantially by the Private Equity firm with minority stakes with the promoters – first generation entrepreneurs.

While the promoters have been personally involved with the growing of the business, they have inducted professionals into key managerial positions. The overseas entities are managed by professionals with independent directors in each of the large overseas entities.

Key issues with the organization

  1. Since the company was set up with an acquisition, there was low data visibility
  2. With several entities in the group, each having a different ERP or a mini ERP, data integration and uniform group reporting was an issue
  3. Since the process orientation was low, decisions were more people driven
  4. Cross cultural issues with each entity wanting to run the operations based on their cultural orientation
  5. There was hardly any finance team as the Group was still in its infancy
  6. Statutory compliance issues and Transfer pricing issues
  7. In the second acquisition, the entity acquiring was a small business, acquiring a business 5 times its size and with a complete different business orientation

Transformation

When I joined the organization, I set up a four point agenda for myself in the organization

  1. Build a strong team
  2. Integrate the processes in various entities
  3. Build a robust reporting template
  4. Get the Group operating structure right with adherence to the Transfer Pricing requirements

Additionally, since the India entity was a Greenfield project, had to complete the financial closure as well as set up working capital limits.

1.  Building a strong team

We had to set up the Finance function in India as well as recruit Controllers in the overseas entities.

Being a start up organization in India, there was low visibility for the Company and the space the Company was in. A fair number of people were offered the role of controller India Operation but all declined citing various reasons, till we found a candidate who was willing to take on the challenge. In the three years since, he has blossomed into a really good resource for the organization.

We took a number of fresh CAs and MBAs with “FIRE IN THE BELLY” and deployed them in various critical projects. Effectively, these young men, were given significantly larger roles in different geographies and the process of integrating the Finance organization across the group

In the USA, we found a candidate who had taken a VRS from a large Industry player and made an offer and he could come on board and start hitting from day one.

In Europe, after a search with the help of the Audit firms, we offered a person from a different industry and had him set up the European operations virtually from scratch.

Given the diversity of the group, it was necessary to get a good IT head. We found a candidate with industry background and experience in SAP implementation and tasked him with unification of the group ERP.

The approach to team building was simple – look for attitude, look for hunger and once the person was in – give a larger responsibility than could have imagined and support them to succeed. And it worked very well.

2.  Integrate the processes in various geographies

The group had 5 different ERPs in all. There were 2 manufacturing entities and 3 marketing entities and each of them had a different ERP and different versions of the same ERP.

The data integration was a serious challenge.

We embarked on a study of a unified ERP across the group – split as Manufacturing ERP and ERP for the Marketing entities.

The two manufacturing entities were in different stages of evolution – one was a very old facility with some old and archaic methods of working and the second was a brand new facility with a focus for enhancing production.

After a lot of discussion and debate and involvement of various stakeholders, it was decided to postpone an integrated ERP but focus on getting a Business Intelligence software, to pull the data from various entities and have group visibility.

To that end, various products were evaluated and we decided to go with robust BI tool.

The business was such that there were virtually new customers every day, new products every week and without an integrated master, it would have been difficult to get an integrated picture of the operation.

A team was created in India to manage the masters in every geography and processes were put in place to ensure that any additions in any part of the Group were managed seamlessly.

While the Group still does not have an integrated ERP, the BI tool implementation has helped in getting a group view on key parameters.

3.  Build a robust reporting template

When I joined the group, there were some reports but there were individual entity reports and not comprehensive and more importantly comprehensible.

The group did not have a view of the group wide sales, margins, working capital etc.

Further there was no group integrated reporting of the Financials – P and L, Balance Sheet and Cash flows.

We created a group reporting template and had the buy in of all the stakeholders in each of the group entities.

The challenge was then in getting each of the group entities to adapt to the Group reporting templates.

There was stiff resistance from all the non Indian entities for the change.

The approach we took was to prove that these templates were in the interest of the Entities concerned and sent out members of the India team to each of these entities to assist them in the changeover. Once there was a demonstration of how things can be done, the group entities, over time started delivering the reports on time.

Over time these formats were refined and process so well defined, that the Private Equity investor found the reporting pack one of the best reporting packs in their investments in India.

4.   Get the Group operating structure right with adherence to the Transfer Pricing requirements

A group operating in different geographies with multiple manufacturing entities and multiple marketing entities needed a robust transfer pricing mechanism, which was compliant with the tax laws in each geography.

We engaged one of the leading players in the TP area to advice us on the subject. Based on the advice we modified the transaction structure between the entities.

These are only some of the challenges which went in getting a multi location, multi culture group entity getting integrated and start reporting and acting as a Group and the role Finance played in this endeavor.

The role the Finance and IT team played in handling the challenges was incredible and the support from the auditors and the TP advisors was exceptional.

MyCFO  (deepak@wealthtree.in)

IT an integral part of the modern day CFO responsibility?

Sohil ParekhMr. Sohil Parekh is Vice President – (Finance and Accounts) with Sai InfoSystem (India) Limited (SIS), one of India’s fastest growing ICT conglomerate with group turnover of Rs.2000 crore, backed by a team of 2000 professionals. SIS has the business expertise in verticals of Hardware manufacturing, Software development, System Integration, Telecom Products, Disaster Management, eHealth, Data Center and Call Center Solutions. SIS has more than 100 support centers across India with overseas operations in Canada, US and Dubai.

He has overall 10 years of experience in the areas of Finance and Accounts. Academically, Mr. Parekh holds a degree in Law and is a Chartered Accountant from The Institute of Chartered Accountants of India.

Mr. Parekh is part of Management Core Team and Head of Department of a 30-member team, covering the functions of Accounts, Finance, Audit – (Statutory & Internal), Legal and Secretarial affairs. He is actively involved in advising management on strategic business partnerships, joint ventures and viability of new business avenues. He further manages evaluation, due-diligence, documentation and post-merger integration for all acquisitions both – overseas and domestic for different business verticals at SIS.

Prior to joining SIS, he was working with Azure Knowledge Corporation as Chief Financial Officer and has also worked with Motif Infotech as Director Finance in past.

Is IT a part of modern day CFO responsibility?

In today’s world there is no denying the importance of IT. The last decade has seen information and communication technologies dramatically transforming the world, enabling innovation and productivity increases, connecting people and communities, and improving standards of living and opportunities across the globe. The scope of today’s IT includes complete process of computer based information systems, Functional IT systems like MS, statistical analytical software, Network IT Systems like email, IM, electronic conferencing, Management IT Systems like HRMS, Financial MIS, Dashboards, Enterprise IT Systems like accounting software, CRM, Computing Hardware, Telecom equipment and services, E-Government, e-commerce, e-security, e-health, e-banking, ITES, BPO, Application development, Operating Support and security services, Networking, Data design, development, communication and conversion, Storage and Retrieval and many more.

There are few reasons that attributed to an IT failure like System failures and breaches of data security, great expectation and inability to deliver, inadequate spending due to lack of long-term strategy & high risk, lack of adequate skilled manpower and infrastructure, IPR, compliance and transfer of policy issues, poor project planning, weak business case, lack of top management involvement, new technology advancements etc.

It’s important to put the relationship between IT and the CFO into historical context as a backdrop for effective discussion on this topic. The good news is that IT has become better aligned with other areas of the business; the bad news is that IT has lost most of the benefits of reporting to the CFO (i.e., scrutiny, rigor, professionalism, credibility, legitimacy, etc.). We shall discuss the need for IT and CFOs to reengage – to perhaps forge a new relationship – one that will favorably impact the IT ROI.

Today, successful CIOs blend few roles that seem contradictory, but are actually complementary – To make innovation real, being a value creator, raise the ROI of IT and expand business impact at lower costs. Top of CIO’s agenda today is business involvement, business transformation with clear objectives, choosing a single vendor for integrated suite of application, having a clear business case for outsourced vs. in-house and benefit tracking during and after implementation.

The challenges to CIOs are that they are sometimes challenged to bring meaning to the vast amounts of data across the organization, lack of clarity around data and analytical requirements and data ownership, poorly defined business requirements and unclear business processes and data integration.

The CFO’s agenda today reveal a shift in focus from core finance to more enterprise focused activities. CFO today needs to have direct operational experience to think beyond budget and annual financial plan. A CFO with a long-term view on growth and profitability will segment IT spend into operational and investment buckets.  Looking for cost reduction in the former and viewing the latter as an investment to drive scale efficiencies and speed to market across the enterprise. A broader enterprise focused role requires core Finance efficiency be in place to reliably support business insight and decision making.

The challenges to CFOs with respect to IT are that they are challenged to bring fact-based business insight on financial performance, lack of clarity on the performance scorecard, poorly designed predictive models, structural complexity of data and processes and adapting to changing business dynamics. Nowadays CFOs are more actively involved in Enterprise cost reduction, Selection of KPI’s, Capital asset management, Risk Management and Strategy/Business model innovation.

These are the few survey results that have been conducted by different agencies to understand the CIO-CFO relationship 2011 Gartner FEI technology study: More than 51% of the CFO has increase in their roles and responsibilities then in 2010; More than 27% are delaying work on IFRS. 40% of IFRS impacted organization has not yet involved IT and only 32% CFO see CIO as true partner in strategy.

Many organizations have experienced friction between CFOs and CIOs. Much of it stems from these two executive roles having different backgrounds and not completely understanding the challenges and complexities of each other’s world. When projects experience difficulties, for example, return on investment is affected and frustrations rise. This often causes CFOs and CIOs to “grow apart.” Here are few actual business scenarios where CIO reporting to CEO and CFO can be broadly categorized:

Business Scenarios where CIO can report to CFO:

  • CFO can ensure that IT spending is controlled
  • CFO can help liberate CIO with the problem of negotiating prices and maintenance fees with technology vendors
  • If the business is only looking towards new IT investments and continuous improvements
  • Companies which have business driven by costs which can offer low prices by achieving economies of scale, cost control and efficiency
  • Can help CIO become strategic partners rather than simply purchasing managers for IT equipment
  • CIO should welcome CFO who takes interest in where a company places its IT Investment bets
  • As the business is all about profit and revenue earned, CIO should review the requirements in financial terms for executive decision making
  • IT enabled Intelligence is what CFO should command as a task master from his CIO and MIS teams
  • CFO directs decisions and budgets purely on basis of information and its reliability rather on subjectivity
  • CIOs choose and evaluate systems, but cannot direct and execute decisions without a 360 degree view which the CFO commands and enjoys

Business Scenarios where CIO can report to CEO:

  • As CEO focus is on business’ overall strategy and management, CIO should report to CEO in order to recognize and promote the relevance of IT to the business
  • Where the company and industry is highly information-intensive (for example, banking and media) or moderately information-intensive (for example, services such as travel and retail)
  • While a technology-dependent business model or company transformation is under way — for example, merger and acquisition process integration
  • While a heightened state of information-related threat or risk is in play — for example, cyber warfare, industrial espionage, regulatory compliance or information-intensive business volatility
  • With both IT and CFO reporting to CEO, CEO can break any ties regarding strategy versus costs
  • With CIO reporting to CEO, some of the innovations will not get stifled due to a cost issue alone
  • CEO can look across all business segments and can actually account for the productivity, innovation, and synergies

Everyone uses the same set of tools to select IT projects (payback, NPV, alignment with corporate goals). Everyone uses common industry indicators (IT as % of revenue). Existing measures aren’t perfect but they are good enough. Assessing IT ROI is difficult. The key point here is that we should not blame the tools. Although improved tools always help, the means to IT value is improved governance procedures to guide IT investment decisions – not measurement. Below are the relevant questions that CFOs should ask for right integration with IT:

1.  Whether IT understand the information need from stakeholders’ perspective – shareholder, Board, Statutory reporting, Top Management.

2.  Are the IT investments meeting the organization requirement?

3. Whether the enterprise strategy is as detailed as possible with respect to definitions and integrity? Global systems have local variation which should be factored into to provide analytics.

4.  Whether the company has the right tool to manage, retrieve and analyze data?

5.  What are the correct way to use the multiple tools for information access and delivery, how to deploy them and have the business adopt the same?

6.  Whether the IT cases and budgets are in line with the organization strategy?

7.  Whether the charge back mechanism is identifiable and pre-defined?

8.  Evaluate the opportunity costs of investments in IT. It should compete with other capital projects in terms of feasibility assessment. All internal IT projects should be certified and should compete with other IT projects. It is best if CIO has no money and is forced to spend “everyone else’s money”

9.  The IT projects should be accepted and evaluated on merit rather than on ego. If a system fails to receive funding or gets cancelled, it reflects badly on the sponsor/owner.

10.  The project is forced to pass through a “gate” at the end of each stage of development. The gate is basically a “go/no go” decision. Both the costs and benefits should be evaluated at each stage by the CFO. Revisit current KPIs, departmental goals, and metrics to ensure that technology and IT are aligned to these important business measurement

11.  How much time it will take to recover the costs? How the IT assets are to be written-off? What are the maintenance costs of any IT project?

12.  Whether it has been determined to which projects and cost centers the IT costs be allocated and in what basis?

A responsible CFO invests time and energy in understanding dashboard views that predicts and reflects state of affairs. Multi locational, high volume companies suffer from creating and storing data that has not been analyzed and provide very little value to decisions support systems; it is the CFO who points to such data and coverts into information that can fortify MIS. With islands of information available on different set of systems, CFO would be a pivotal force in making bridge and view that showcases sensible data assists CIO in setting up of process aimed at higher value of returns from existing investments. CFO also needs to get close to the CIO and understand technology so that they both can work together and implement the best possible solutions in their organizations

One of the important thing that comes out of this is the fact that a CIO today needs to upgrade his skill set and be aware of finance and business dynamics to ensure that his position in the company is viewed with equal importance like that of a CFO. IT should become the bridge between the CEO and CFO and thereby integrate business leading and lagging functions.

CIOs and CFOs can collaborate to address their challenges above by defining the company performance scorecard, developing and supporting “one version of the truth”, instituting a data governance process, improving performance reporting with defined risk indicators, implementing Governance Risk and Compliance solutions to monitor business process changes, supporting automation and collaboration efficiency with enabling technologies, developing consistent policies and standardization of processes. The IT function should take ownership of the technology, the business takes ownership of the organizational transformation and the CFO takes stewardship of the benefits

www.mycfo.in deepak@wealthtree.in